Public Contracting 101: Surety Bonds

This post is another in a series on the basic concepts and tenets of public contracting in Pennsylvania. Today’s post concerns surety bonds and surety claims. This topic is of critical importance to subcontractors and suppliers on public works projects.

Under the Pa. Public Works Contractors Bond Law of 1967, all public contracts for public works (defined as the construction, reconstruction, alteration or repair of any public building or other public work or public improvement, including highway work) in excess of $5,000 must be accompanied by both a performance bond (at 100% of the contract price, to protect the owner against non-performance) and a payment bond (at 100% of the contract price, to protect subcontractors, suppliers, and laborers against non-payment).

The surety bonds must be issued by a surety company authorized to do business in Pennsylvania. They must also be filed with the public entity awarding the contract.

Payment bonds protect subcontractors and suppliers who have performed labor or furnished materials on a public project. The protection extends to those with direct contracts with the prime contractor and those with direct contracts with a subcontractor or supplier to the prime contractor.

Claims against payment bonds are governed by the Pa. Bond Law. Direct subcontractors and suppliers can bring a claim 90 days after the last date work was performed or materials were supplied. Second tier subcontractors or suppliers must first give written notice of non-payment to the prime contractor, by registered or certified mail, within 90 days from the last date work was performed or materials were supplied.

If a prime contractor has paid its subcontractor in full, but the subcontractor has not paid its subcontractor or supplier, the second tier subcontractor or supplier is out of luck on a claim against the payment bond. In Trumbull Corp. v. Boss Contruction, Inc., 768A.2d 369 (Pa. Cmwlth. 2001), the Commonwealth Court ruled that in such a case the unpaid second tier subcontractor or supplier is barred by a “safe harbor” provision of the Pa. Procurement Code from bringing a payment bond claim. The “safe harbor” provision states as follows:

“Once a contractor has made payment to the subcontractor according to the provisions of this subchapter, future claims for payment against the contractor or the contractor’s surety by parties owed payment from the subcontractor which has been paid shall be barred.”

The public entity is required to provide a copy of payment bond to a subcontractor or supplier who has not been paid upon submission of an affidavit to that effect.

Public Contracting 101: Steel Products Procurement Act

This post is one in a series on the basic concepts and tenets of public contracting in Pennsylvania. Today’s post concerns the Pa. Steel Products Procurement Act, a virtual relic of public contracting in Pennsylvania, one that has been around for more than 30 years, but is still of important relevance today.

The Act was passed in 1978 with a stated purpose to protect the U.S. market for steel production and supply. The Act provides that any steel products used or supplied on a Pennsylvania public works contract must be made in the U.S. If the steel product contains any foreign steel, it is a U.S. product only if 75% of the cost of the product has been mined, produced, or manufactured in the U.S.

A public works contract is one for the construction, reconstruction, alteration, repair, improvement, or maintenance of public works. In turn, “public works” has a broad definition as follows:

Any structure, building, highway, waterway, street, bridge, transit system, airport or other betterment, work or improvement whether of a permanent or temporary nature and whether for governmental or proprietary use. The term includes, but is not limited to, any railway, street railway, subway, elevated and monorail passenger or passenger and rail rolling stock, self-propelled cars, gallery cars, locomotives, passenger buses, wires, poles and equipment for electrification of a transit system, rails, tracks, roadbeds, guideways, elevated structures, buildings, stations, terminals, docks, shelters and repairs to any of the foregoing.

Contractors performing general construction work for public entities in the Commonwealth must be especially vigilent in their compliance with the requirements of the Act. There are grave consequences for a violation of the Act, including the withholding of payment and, in the case of a willful violation, a 5-year debarment. An exception in the Act exists where the head of the public agency, in writing, determines that steel products are not produced in the U.S. in sufficient quantities to meet the requirements of the contract.

PennDOT has issued new guidelines for compliance with the Act for PennDOT contracts. The website of Associated Pennsylvania Constructors has a link to the new PennDOT guidelines here.

Recently, in Mabey Bridge & Shore, Inc. v. Schoch, 666 F.3d 862 (3d Cir. 2012), the Act withstood a federal constitutional challenge from a contractor who had to cancel four contracts for temporary bridges on PennDOT projects, and who has been barred from giving future quotes. The contractor had supplied PennDOT with temporary bridges for more than 20 years on 50 different PennDOT projects. But, in 2010, PennDOT notified the contractor that its temporary bridges were prohibited by the Act. In Mabey Bridge & Shore, the contractor claimed that the the Act was unconstitutional and that it was preempted by the federal Buy America Act. The U.S. Court of Appeals for the Third Circuit rejected the contractor’s challenges, found that the Act was not preempted, and upheld PennDOT’s decision.

The Third Circuit’s decision in Mabey Bridge & Shore can be found here.

Posted on August 21, 2012 by Christopher I. McCabe, Esq. in Public Contracting 101, Steel Products Act Comments Off

Public Contracting 101: Retainage

This post is the first in a series on the basic concepts and tenets of public contracting in Pennsylvania.

Public works contracts in Pennsylvania may include a provision for the withholding of retainage. Retainage is a sum of money which is withheld from payment until the contract is completed.

However, under the Pa. Procurement Code chapter applicable to public works contracts, the retainage cannot exceed 10% of the amount due the contractor. When the contract is 50% completed, one-half of the amount retained by the government agency must be returned to the contractor, provided that the architect or engineer approves payment, and provided that the contractor is making satisfactory progress, and there is no other reason for holding more retainage, such as a backcharge claim. After the contract is 50% completed, the retainage cannot exceed 5% of the value of the completed work.

For multiple-prime projects, the government agency can hold additional amounts as retainage, equal to one and a half times the amount of any possible liability, where there is a dispute between the prime and the government agency based on increased costs claimed by one prime caused by the delay of another prime . This additional retainage can be withheld until such time as a final resolution is agreed to by all parties directly or indirectly involved unless the prime causing the additional claim furnishes a bond satisfactory to the government agency to indemnify the agency against the claim.

Retainage may be withheld from the contractor only until substantial completion of the contract.

If the government agency refuses to follow the foregoing rules, it may be liable to the contractor for interest and penalties on the wrongfully withheld amount. Furthermore, while government agencies often attempt to impose varying retainage provisions and requirements in their forms of contracts (typically AIA forms), such provisions are likely unenforceable as they contradict the statutory provisions of the Procurement Code.

Unless there is sufficient reason, a contractor must pay all of its subcontractors their earned share of the retainage the contractor received within 20 days of the receipt by the contractor.

The Pennsylvania statute on retainage (62 Pa.C.S. §3921) can be found here.